Category Archives: Entrepreneurship

Watch Your Asset – It May Not Be a Resource

First, the bad news: making operations, finances, and employees work to maximum value can mean having to eliminate some employees or operations at times. The good news, though, is that many businesses have been able to hold on to existing resources–even during a turnaround situation–by reassigning them to better purposes and uses where required. This is the heart of asset redeployment–the practice of reassigning people, things, and efforts to achieve optimal efficiency. By using capital wisely, your team can make it stretch a lot further. For example, coordinating employee and independent contractor work to produce the greatest amount of work with the fewest number of people working the least number of hours means greater return on efforts and dollars.

Eliminating Operations

Eliminating unprofitable operations–in whole or in part– is a wide-ranging task. Anything that may be termed “waste” in the company needs to be discarded or put to better use. One area that should be addressed is waste due to unnecessary multiple consumption of potentially shared resources. In plain terms, the individual use of items that could be shared is an extravagance that few small businesses can afford. Think of shared printers rather than a printer on each desk as an example. it is highly unlikely that every single person in the office will be printing at the same time. What’s more, high volume printer/copier combination machines use less expensive toner than ink cartridges in smaller units. This initiative may require more cooperation and patience than providing unique units for each employee, but such a move can reduce the amount of money the company must spend to get work done.

Avoiding Duplicate Efforts

A counter problem to the above is too many employees doing the exact same job, either knowingly or unknowingly. Such multiple effort, a clear waste of time, resources, and money, often occurs when someone is fearful of delegation or feels threatened by another’s talents and abilities. Therefore, management should make sure that several people are not doing the same job in differing formats and degrees. 

Non-linked software is a perfect example of this kind of waste; if the secretary maintains supplier addresses and phone numbers, and the accounting group keeps the same information in their files, someone is performing an unnecessary job. Instruct employees in ways to avoid duplication of effort. Look across your organization, document processes by task, and find ways to reduce overlap. This is not to say that your staff should not be cross-trained. It is, in fact, good succession planning and talent management to have people who could do someone else’s job in a pinch!

Managing Capital Resources

Capital resources include facilities, supplies, and work in process. Buying only what is needed when needed (“just in time”) is one way to wisely manage resources. Another way would be to try to have more finished goods inventory than unfinished, because finished goods can be sold quickly to raise cash. At times, you may consider renting or leasing an asset rather than purchasing it–especially if the term of the contract is less than the useful life. You may elect to “turn in” resources that you don’t need very often or convert them to less cash intensive resources through alternate financing. 

Coordinating Human Resources

This is an area often overlooked because it is seen as “just administrative.” When employees, however, have jobs that overlap in requirements, it is up to the executive team in the small business to correct the situation for optimization. When your people are performing jobs that are not their strong suit, they usually take more time and make more mistakes than a better qualified and motivated counterpart.

Develop a competent management team to help you steward resources more efficiently. There are multiple areas for gains in efficiency and profitability if you will commit to the process. Note: process rather than one-time task–follow-through and experience the fruit of your labors!

Keeping Costs Under Control

If expenses are simply allowed to fluctuate, with no way of monitoring where they will be, optimal profitability will be hard to come by. Cut out as much fat as possible and keep the company lean. Clearly, certain expenditures are necessary and unavoidable. There are ways, however, to limit their influence on company profitability. For example, taking advantage  of any offered cost savings an creating efficient procedures to save time and project financing overruns will cut costs significantly. A purchasing requirements program is a start for reducing many hard costs. Most soft costs, however, can be decreased through effective scheduling.

An effective requirements program includes the following steps:

  • using purchase orders 
  • inspecting all deliveries
  • taking advantage of discount incentives
  • implementing invoice verification procedures
  • scheduling efficiently

Using Purchase Orders

Purchase orders are seen as a relic of old business practices by some. Others view them as an indispensable management tool. Somewhere in between the extremes there is a fit for every organization. Their usefulness is in getting reliable quotes upon which invoices can be checked later.

Inspecting all Deliveries

Inspecting all deliveries is essential to make sure orders are shipped according to the quantities and quality specifications provided on the purchase orders. Many managers complain that they do not have the time to physically inspect every item delivered to a work place. Inasmuch as doing so would require a huge time commitment, they are right.  However, for containing cost overruns, these same managers could not be more wrong in their assumptions.  Inspecting samples  from every delivery when delivered and figuring quantities by up close, visual inspection are necessary steps to ensure that suppliers are responding to the company’s needs.

Taking Advantage of Discounted Materials Prices

When suppliers make discounts available on purchases, your team should try to make the most of them. In addition, verify all invoices against delivery inspection reports, checking  the invoiced amount against the total amount delivered, and unit prices against the purchase order. This procedure will help ensure that a supplier’s negligence is not costing the company money.

Scheduling Efficiently

Time constraints are of utmost importance in eliminating inventory carrying costs–whether your business produces goods or services. If a product line or project is slow to be completed, many extra costs begin to accumulate. Alternative uses of profit margins are foregone. Had your team been able to finish sooner and collect within a finance cycle closer to the one in which work began, there would have been profit margin to discuss how to allocate. With margins, choices exist that don’t otherwise–suppliers can be kept happy and bankers and investors can too! If yours is a business that uses work in process assets, insuring those assets is an ongoing cost for the company. Theft and obsolescence of design and features due to carrying raw inputs too long further eat away at margins. The cost to repair items damaged over time also rings up expenses. All of these combine to make inventory (due to delayed delivery) costly.

Proper scheduling is not limited to getting one work team to immediately follow another onto the job. By ordering raw inputs in bulk through purchase orders, trips to supply houses are reduced, resulting in cost savings through lower fuel costs and less time away from actual work. As these employees spend more time on the job and less time running around town picking up materials, their projects are completed faster. Getting teams to succeed one another promptly with slight overlaps can also tighten production schedules and help reduce costs.

By tying your project financing to interest rates in a market where rates are rising, you and your team can make the most of prompt completion of projects. If you operate efficiently, you can move before rates rise consistently. Finally, scheduling vacations with as little overlap as possible will help with your production efficiency, and thereby improve margins.

 

What to Do When Financing Fails

Having been in business in the same town for almost twenty years, a Midwest company was accustomed to expansion and going after market opportunities. The owner had kept her business competitive by continuously improving product offerings and learning from the input of both customers and target customers. With a loyal, experienced operations team, she felt that she had the recipe for long-term success. However, when the recession of 2008 hit, she was unable to obtain a renewal of her line of credit by which she had historically been able to normalize cash flows.

The case study above illustrates a business principle–that we must always as business owners prepare for the unexpected and have the flexibility to adapt to changing market conditions. If we seem surprised when an action that we did not anticipate occurs, then it follows that either: 1.) our planning is incomplete, 2.) our systems and processes are too unresponsive to key indicators, or 3.) we have not established a feedback loop that provides us as small business executives with vital, timely information. Regardless the reason, it is poor management to not have a contingency strategy or tactic in mind for situations that may arise.

What should an executive team do when financing from lenders or investors falls through? First, the reason  for such a collapse in financing is normally attributable to one of the following:

  1. Partners or new regulations restricted the financing source from making (continuing) the deal.
  2. A more attractive alternative was available to the lender/investor from another source at the same time.
  3. The company failed to read the market conditions and adjust the financing request accordingly.

To stabilize the business in response to one of these situations, the owner and top finance executive should always seek new sources of funds–even if today’s source has been very reliable. If you have built relationships with other providers of financing, you may be able to reduce the risk any one player undertakes by spreading it among several. Alternately, you may find that some institutions have differing standards for new clients than for existing ones and may want the entire financing facility.  In either scenario, it is incumbent upon you and your team to perform due diligence. Find out how the bank (or alternate source) has shown commitment to other borrowers. In many cases, your accountant or attorney may be able to recommend new sources for you. Others in your trade group may have similar referrals to provide.

Being able to lay out both your best case scenario and a worst case one will show a new source your planning strengths and help to establish credibility. Ask questions about how credit facilities could be expanded as you hit milestones. Offer your plan for reporting your financial and operating performance. Discuss what the loan covenants may look like and have frank conversations about how your team will accommodate the request to demonstrate creditworthiness.

To avoid a recurring financing problem, owners should try to over-finance their operating needs whenever possible. It is extremely valuable to have credit available that is not being used–this cannot be overstated! Given that this funding source may dry up at any point, you never want to have to go back to the lender or investor because you failed to anticipate growth. 

The other recommendation is that you look at different types of credit. If you traditionally have only taken out installment loans, look for lines of credit–and vice versa. There are additional types of financing that may also be advantageous to consider–accounts receivable, factoring, purchase order financing, contract or project financing, asset based lending, leasing, etc. By using more than one type of funds from more than one source, you are diversifying your vulnerability to a credit restriction that could be deleterious to your business success.

Fail to Research; Fail to Secure Market Share

As companies seek to gain a competitive market position and execute on their business objectives, various problems can crop up. In the last post, we examined a case study on inventory control as one issue that needs addressing. In this installment, we will look at a case study involving loss of market share:

A company in the Northeast had always been able to sell enough product to secure a 15-20 percent local market share within the primary price range and portfolio of designs. As other competitors began to outsell this company in the local market, the owner commissioned some research to determine what percentage of the market share had been lost. Upon discovering that their share had dropped to 9-11 percent, the executive team became worried.

Why would this company’s–or any company’s–market share deteriorate to this point? Experience shows that one common reason for the decreased market share might be increased competition. As other competitors, whether established or new businesses, begin to offer viable or even more attractive alternatives, your business may begin to lose a percentage of share  in the local market. Another possible reason for declining market share could be perceived poorer quality in the products offered. Rumors of a company’s demise can fuel such a perception and scare buyers away, allowing other businesses to take advantage of this image problem.

The solution to declining market share varies according to the source of the problem. If bad image and rumors appear to be hurting the business, the owner must move quickly to dispel any rumors and improve company image through a bold and highly visible public relations campaign. For example, companies can generate goodwill by meeting with influential members of the local community to let them know that any perceived problems are being taken care of and that the company plans to be making products in the community for some time to come. This exposure can often be gained through attendance at chamber of commerce and other local business group meetings.

To overcome competitive advances, the executive team must aggressively outmarket and outproduce competitors in each niche market. By beating them in head-to-head competition, the problem is solved while the company’s reputation for high quality products is enhanced. In terms of quality initiatives, management should devise ways of improving quality in all projects, passing the word along to all employees, suppliers, and subcontractors that quality is becoming an issue and that only those who can produce quality work will remain a part of the team.

Stabilizing and regaining market share demands that the team know the local market inside and out. While calculated risks are allowed if the executive team feels confident that they can get product manufactured and sold quickly, the potential success of any such project must be measurable in terms of researched demand for the product line the company plans to produce. Clearly, companies must target opportunities that allow them to make their best products at competitive prices. By keeping abreast of new developments and new competitors attempting to make an entry into a particular market, the team can revise plans–and keep buyers from running to the competition.

 

Too Many Houses Are Us

Most businesses face unforeseen circumstances while in pursuit of their sales and other goals. The way these situations are handled will quite often determine the degree to which the company’s efforts are successful. A useful method to see what others have tried and what principles we can learn from their experience is the case study. When your business produces products, it creates inventory. When the inventory is too large for the demand, it becomes a problem. Let’s take a look:

A speculative home builder on the West Coast discovered to his chagrin that the market in his local area was inundated with homes very similar in style and price to those he was building in large numbers. There was both a general glut, and a specific one related to this company. As his lender began to point out, an inventory level that has escalated out of control presents severe cash flow problems among a variety of other concerns. The lender was also quick to point out that the builder was in jeopardy of defaulting on construction loan interest payments a couple of months down the road if he did not begin selling some of his inventory–and soon.

How could this builder (and others in a similar situation) end this problem of increasing inventory? First, the problem can normally be attributed to one or more of the following factors:

  • an overbuilt market in the builder’s product offering
  • incorrect, incomplete, or absent market research
  • an inability to revise product in terms of plans, elevations, and prices to meet buyer demands.

Once a builder has determined the existence of increasing inventory levels–and their cause–it is time to stabilize the situation. Selling off an old unit for every new unit constructed is a bare minimum requirement. It is not wise to continue building simply to try to fund aging inventory interest payments out of new construction loan draws. As older homes are sold, new construction can be considered. Due consideration includes understanding the problems that led to former inventory level increases well enough to avoid the same errors in the future.

In addition, an inventory reduction plan should be initiated immediately, making sure to target the oldest inventory with the worst gross margins first in any type of incentive offer. The use of incentives can be gradually lessened as the builder moves through the oldest inventory into newer inventory with better margins. Sales staff can be of great help in determining what may help to move homes. If qualified buyers are hard to come by, it may be advantageous to work with local mortgage lenders and offer a program for qualifying buyers at lower monthly payment levels in the early years of a home purchase. Also, it is always helpful to walk all inventory and make lists of all items that need to be repaired, replaced, or cleaned up.

Finally, a builder can prevent uncontrolled increases in inventory levels by performing more careful, thoughtful research, making revisions to product as soon as buyer tastes are known to have changed, and offering ongoing, automatic incentives for aging inventory to be sold. It is often helpful to “re-research” current projects to make sure that the original research findings remain valid and informative. Periodic product updates and revisions are necessary even in a stable, conservative market. Buyers are always looking for small things that make one home purchase better than another. By catering to buyers’ particular tastes and requests, a builder can offer a better home and still make money.

Even if you are not in the homebuilding business, but in some other business that has inventory, these principles are important to observe. Think through ways to reduce inventories–better yet how to prevent them from ever becoming a problem!